U.S. Department of the Treasury Internal Revenue Service 1040 Individual Income Tax forms for the 2010 tax year. (Daniel Acker/BLOOMBERG)

By Marty NemkoNovember 10, 2011

Marty Nemko, holds a Ph.D. specializing in the evaluation of innovation from the University of California, Berkeley and subsequently taught in its graduate school. This is the third in a series on thinking outside of the box when it comes to the nation’s leading challenges.

The Occupy Wall Street protesters claim our tax system is rigged in favor of corporations and the wealthy. They’re not alone in calling for change. A poll by The Economist finds that 62 percent say the tax system needs a major overhaul.

Two studies show the estimated cost of our current tax system. University of Michigan professor Joel Slemrod, in his June 2004 testimony to the House Ways and Means Oversight subcommittee estimated that Americans spend at least $135 billion annually. Meanwhile, The Laffer Center, which promotes supply-side economics in partnership with the non-profit Texas Public Policy Foundation, published a study showing the cost to be $431 billion a year. We’re all eager to find a way to get back even a few minutes in our day and a few extra dollars in our wallet. Imagine if all that money and the time it takes to prepare our taxes annually were returned to us.

And underpayment of income tax is rife. According to a 2009 Treasury Department report, the tax gap was $290 billion. In our system, cheaters too often win.

Given this, and setting aside, for the time being, how much should be collected in taxes and the thorny questions surrounding state and local taxation, why not replace the income tax with a national sales tax? It is more resistant to cheating, requires less paperwork, and with the following exemptions, is kinder to the poor than those proposed by our presidential candidates. Under this proposed version, basic food, clothing, shelter, and cars under $3,000, among other commodities, would be exempt from the tax.

If voters want additional taxation of high-income earners, institute a ground tax, which would require landowners to pay a federal surcharge on the land portion of their property tax. That’s minimally game-able, doesn’t require recordkeeping, and doesn’t penalize land owners for improving their property.

This national sales-tax rate would be reduced by including Internet sales as taxable and by nationally legalizing, regulating and then taxing prostitution, and by heavily taxing alcohol and tobacco, since consumption of both products impose tremendous burdens on the health care system. Because of those, the revenue-neutral rate could be around 10 percent.

Here are some advantages of a sales tax, which essentially taxes consumption, over an income tax:

— Consuming less means we’re more likely to base our career choice on societal benefit than on income potential.

— Taxing consumption would lead to a decreased national carbon footprint.

— Spending would likely be reallocated from products to services, such as personal assistants and tutors. While most of those jobs would be part-time positions, two or three of them could comprise a reasonable living and a career that many if not most people would consider more rewarding than manufacturing or distributing physical commodities.

Of course, if consumption declines, some jobs will be lost in production, tax accounting, and the IRS. Also, GDP would decline somewhat because language and cultural barriers make services less exportable. But just as most people wouldn’t justify the tobacco industry because it creates jobs and increases GDP, that shouldn’t justify retaining a high-consumption society.

Some experts prefer a value-added tax (VAT) to a national sales tax because it’s more fraud-resistant, but a VAT likely requires as much paperwork as an income tax. Also, a lack of transparency has allowed governments in countries with a VAT to balloon the tax rate unbeknownst to a majority of the population.

Under this federal tax reform proposal, interest, dividends, and capital gains would be lightly taxed in an effort to spur investment, which would then boost innovation and create jobs. It’s likely that a majority of Americans believe it is fair that people who earn money without working for it should have that income taxed. Under this new national sales tax, investment income under $5,000 a year would remain untaxed. That rate would rise to 15 percent at $40,000 plus.

Estates would be heavily taxed under this plan. After all, it would hardly be politically unpopular for an elected official to argue that it is unfair for someone to receive a fortune by birthright. I envision the first $100,000 remaining untaxed, but that the rate would accelerate to 65 percent on inheritance over $1,000,000.

With regard to payroll taxes, the plan would retain Social Security for the poor, which would be paid for by the national sales tax. However, Social Security would be phased out for everyone else. Despite the hefty 10.4 percent Social Security tax on earnings up to $106,800, the payout is low and the program is at risk of bankruptcy. Of course, if Social Security were phased out, some taxpayers would lose but, overall, it could be considered wise to leave that huge amount of money in taxpayers’ pockets to spend or invest as they see fit — a plan that should not be confused with the mandatory savings plan George W. Bush proposed during his second term. The phasing-out should be quite gradual to reduce taxpayer disgruntlement and lawsuits. In addition, political leaders should tie that phase-out to the increased taxation of the wealthy and corporations, and inspire the nation to understand that this “shared sacrifice” is essential for our nation’s security and that of our children.

So what do you think? Would my plan improve our system of federal taxation? It sure could use a catchy name like 9-9-9. 10-15-65 just doesn’t hold the same appeal.

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